The ACOEL blog has devoted several entries over the last two years to the question whether and how a plaintiff could recover, under CERCLA, costs it incurred for a cleanup performed under a consent decree or administrative settlement.  One of the more intriguing developments for CERCLA practitioners has been the tension between and radical differences to cost recovery or contribution claims under Sections 107 and 113 of CERCLA.  One of the more recent developments is the 11th Circuit decision in Solutia v. McWane (Full disclosure: I am counsel to several defendants in this case). 

"Boots" Gale previously blogged about the District Court decision. The District Court dismissed Plaintiffs’ Section 113 claim on the basis that these Defendants had the benefit of CERCLA’s contribution protection obtained via their own administrative settlement with EPA.  Initially, the District Court denied summary judgment on Plaintiffs’ Section 107 claim, but then reconsidered and reversed that decision. 

The 11th Circuit noted that the Supreme Court's Atlantic Research decision declined to decide the issue of whether a party may bring a 107(a) claim for direct cleanup costs incurred via a consent decree entered as past of CERCLA Section 106/107  litigation.  The 11th Circuit confirmed, however, the conclusion of the District Court that numerous federal Circuit Courts had reached that issue since that time, each one concluding Section 113 to be the party’s exclusive remedy, and denying the Section 107 claim.  Relying in part on the conclusions reached by these other Circuit Courts, the 11th Circuit rejected Plaintiffs’ statutory interpretation arguments, and concluded that a party who has a CERCLA Section 113(f) claim cannot also maintain a CERCLA Section 107 claim.  To find otherwise, the 11th Circuit concluded, would “thwart the contribution protection afforded to parties that settle their liability with the EPA…”, “destroy CERCLA’s statutorily-created settlement initiative…”, would allow a plaintiff to impose joint and several liability on defendants, and would prevent those defendants from asserting any Section 113(f) counterclaim since the plaintiffs would have their own CERCLA contribution protection via their consent decree. 

The time has not run yet for the Plaintiffs in this case to seek certiorari from the Supreme Court.  In light of the unanimity of the federal Circuit Courts on this issue, it seems unlikely that the Court would accept the case for decision, despite the importance of the issue and the Court’s decision not to reach the issue in its 2007 decision in Atlantic Research.

One of the more recent and interesting decisions in the world of CERCLA litigation practice was rendered just a few days ago by a federal district court in Pakootas v. Teck Cominco Metals Ltd. The judge in that case articulated the legal underpinnings of the often confused notions of CERCLA-based divisibility of harm and apportionment of liability determinations. 

The judge explained that divisibility of harm does not defeat CERCLA liability itself but, instead, is a defense to joint and several liability citing with approval language from U.S. v. Monsanto Co. to the effect that “ . . . While it appears “divisibility” and “apportionment” are terms used interchangeably, what is potentially divisible is the harm, and if the harm is divisible, what is potentially apportioned is liability, assuming there is a reasonable factual basis for apportionment.”

Against this legal backdrop, the facts in Pakootas brought into sharp focus a commonly encountered situation for CERCLA litigants where multiple parties find themselves attempting to apportion response cost liability for different contaminants, released from different facilities that have become commingled, and are encompassed within what the EPA or state regulatory agency has deemed to be a single “site”.

In addressing an apportionment claim Judge Suko, sitting in the Eastern District of Washington, articulated the importance of the distinction between apportionment of liability in such situations and divisibility of harm.  Judge Suko stated that the first inquiry in the apportionment battle must always be to fix responsibility for the harm for which a party might seek to apportion liability.  The court appropriately held that a CERCLA liability determination is based upon the liability- imposing language of the statute itself:

. . . [L]iability attaches when three conditions are satisfied: (1) the site at which there is an actual or threatened release of hazardous substances is a “facility” under 42 U.S.C. Section 9601(9); (2) a “release” or “threatened release” of a hazardous substance from the facility has occurred, 42 U.S.C. Section 9607(a)(4); and (3) the party is within one of the four classes of persons subject to liability under §9607(a). Pakootas I, 452 F.3d at 1073-74.

In Pakootas the party seeking apportionment (Teck) was clearly a liable person under CERCLA and was undeniably associated with the release of contaminants that could be traced only to the facility it operated.  Teck argued as an affirmative defense to a liability claim that the “harm” at the site should be “apportioned” since the contaminants released by Teck could be discretely indentified even though they had become “commingled” with those released by many others. Teck reasoned that it could defend itself against a joint and several liability claim by way of such “apportionment”.  In so many words, Teck sought to apportion liability based upon divisibility of the contaminants associated with its releases.

Judge Suko observed that:

The fact for liability purposes the . . .  Plaintiffs need to, and intend to, establish that Teck’s slag and/or liquid effluent released or threatens to release hazardous substances (certain metals) from the UCR Site does not, however, limit the scope of the releases or threatened releases from the Site for which Teck can be held liable and, in turn, does not limit the scope of the relevant harm for divisibility/apportionment purposes.

After a thorough examination of many of the more recent contribution/apportionment appellate decisions from around the country, Judge Suko ultimately determined that Teck failed to prove that contamination at the site involved was divisible and, as a result, would be subject to CERCLA 107 joint and several liability with other potentially responsible parties at the site. 

If you find yourself representing a party in an apportionment dispute, this case seems to stand for the proposition that if you cannot determine everything that everyone may have done to create a contaminated site; you may be in trouble in pursuing an apportionment or contribution action.  Additionally, and it is just my personal opinion, the decision represents one of the better anthologies of apportionment/divisibility jurisprudence I have seen in recent cases (and that includes some of the work of the Supreme Court). 

Nevertheless, the high burden of technical or scientific proof Judge Suko would impose upon a party seeking apportionment/contribution could well hearken back to the days before post-BNSF days of “reason based” rules for apportioned liability. (See, e.g. J. Barkett, The Burlington Northern Decision, American College of Environmental Lawyers Blog (May 19, 2009).

Phase I report “reliance letters” issued by an Environmental Professional (EP) may be misunderstood and misused in the context of conducting CERCLA All Appropriate Inquiry (AAI). The term “reliance letter,” in fact, is nowhere to be found in either the Federal All Appropriate Inquiry Regulations or the related ASTM Standard E 1527-05.

Consider the following common AAI situation: A client has contracted to buy property for which a Phase I Environmental Site Assessment (Phase I ESA) report was recently prepared for the seller. To avoid the costs of obtaining a new Phase I report, the client asks whether it can use the Phase I provided by the seller to satisfy its environmental diligence obligations. The Phase I report explicitly states that it can be used and relied upon only by the contracting user for which it was prepared. The EP may be willing to issue a reliance letter to the client for a fee or occasionally at no cost. But what exactly is a reliance letter and how does it relate to the objective of compliance with AAI requirements?

Unauthorized use prohibitions and reliance letters are intended to protect EPs from potential claims by third-parties who may rely on a Phase I report prepared for another. Nevertheless, an unsophisticated third-party recipient of a reliance letter may construe such a letter as documentation of compliance with AAI requirements. A reliance letter establishes the recipient’s status as an authorized “user” primarily for purposes of the party’s legal relationship with the EP. Requesting a reliance letter to establish authorized user status is only one of several AAI issues that should be considered by third-party users of Phase I reports.

Other important questions to be considered include whether the one year/180 day regulatory shelf-life of the report has expired. Also, what independent inquiries must a third-party undertake to satisfy the AAI regulations? Third-party recipients of reliance letters may easily overlook conducting the “user” inquiries required by the AAI regulations.

The ASTM Standard further contemplates that the results of the user’s separate inquiries be provided to the EP prior to completion of the EP’s Phase I tasks (the AAI regulations are less clear). How do those provisions of the ASTM Standard apply to the third-party reliance situation? Is the third-party user obligated to accumulate the necessary user information and provide it to the EP after-the-fact? If so, how should the EP deal with any new substantive information? Also, if the results of the user inquiry are not referenced in the Phase I report, how does the third-party document that it has satisfied those obligations?

Of course, the EP may decline to issue a reliance letter or may impose costs or terms that are unacceptable. The EP may even suggest that, absent such use and reliance authorization, a new Phase I ESA must be conducted. But is that correct? The regulations set out conditions for third-party use of information contained in a Phase I report prepared for another. No requirement that the EP preparing the report issue a reliance letter is included among those conditions. The ASTM Standard specifically provides that no particular legal relationship between the EP and the user is necessary for the user to satisfy AAI obligations. With or without a reliance letter, the AAI regulations and ASTM Standard contemplate that the third-party may use the results of a report prepared for another person to partially satisfy its AAI obligations.

These questions, and perhaps others, suggest that a third-party user of a Phase I report prepared for another should be aware of the limitations of a reliance letter, if issued, and carefully consider all pertinent regulations in conducting its AAI.

Sophisticated buyers of contaminated and potentially contaminated property (and their counsel) typically take pains to satisfy the Superfund (CERCLA) defenses for Bona Fide Prospective Purchasers (BFPPs) and Contiguous Property Owners (CPOs).  In 2011, buyers readily understand and conduct due diligence (including the now-ubiquitous ASTM Phase I reports) and, when necessary, comply with “continuing obligations” attendant to owning contaminated property (the subject of other recent entries in this blog). 

A sometimes-overlooked element of these CERCLA defenses requires that buyers not have an “affiliation with any other person that is potentially liable” under CERLCA.  EPA has weighed in with a publicly released memo issued on September 21st, Enforcement Discretion Guidance Regarding the Affiliation Language of CERCLA's Bona Fide Prospective Purchaser and Contiguous Property Owner Liability Protection.  This new guidance covers the two exceptions to the “no affiliations” requirement expressly added to CERCLA, and also addresses four common scenarios where the affiliation issue can arise.

The memo is to assist EPA personnel in exercising their enforcement discretion—on a site-specific basis. Why now?  In this blog on March 22, 2011, ACOEL Fellow Linda C. Martin reported on the troubling case known as “Ashley II”, in which a U.S. District court rejected the BFPP defense, in part, because a liability release between the seller and buyer created a disqualifying “affiliation.”   The decision is troubling because sellers and buyers often indemnify and release each other from environmental liabilities.  The case, involving private parties, is now on appeal.

In this guidance, EPA disagrees with the general notion that indemnifications will create a disqualifying relationship, although the Agency could have directly taken issue with the Ashley II decision.  To its credit, the United States has not been aggressive in finding disqualifying “affiliations” to date (at least as reflected in published judicial decisions).  The public statement of the Agency’s views should not only confirm the government’s litigation posture, but also assist courts taking up the issue in private cost-recovery actions.   

In Morrison Enterprises, LLC v. Dravo Corporation, the Eighth Circuit held that a party who has incurred costs responding to a contaminant it did not release into the environment [Morrison], is limited to recovery of such costs pursuant to Section 113(f) CERCLA.  The Eighth Circuit so held because Morrison incurred its response costs pursuant to an administrative or judicially approved settlement under §§106 or 107concluding that the payment of these costs were “compelled”.  More specifically, because Morrison’s response costs were incurred implementing a remedy pursuant to an Administrative Order on Consent (and a subsequent judicial order), the Eighth Circuit concluded that it was of no consequence that Morrison never released the contaminants in question nor owned or operated the facility where the contamination originated.  The Eighth Circuit said that despite the acknowledged fact that Morrison was remediating a contaminants released by another party at a separate and distinct facility, any effort to recoup its response costs were limited to a CERCLA §113(f) contribution action.  

 The Eighth Circuit noted that the Supreme Court in United States v. Atlantic Research had specifically reserved the precise issue presented by Morrison’s appeal, i.e., whether a party sustaining expenses pursuant to a consent decree following a suit under §§106 or 107(a) could recover such compelled costs under §107(a), §113(f), or both.  The Eighth Circuit held that §113(f) provides the exclusive remedy for a party in this procedural situation.  Morrison disagreed with the Eighth Circuit’s holding and has filed a Cert Petition on the issue reserved by the Supreme Court in Atlantic Research. 

 The Cert Petition points out that the issue of whether compelled costs are recoverable under §107(a) or §113(f) has vexed the lower courts, resulting in confusion and a split of authority amongst the circuits.  The Cert Petition also makes the argument that the plain language of CERCLA permits a §107 claim to recover compelled costs given the absence of a single word  or provision in CERCLA §107(a) limiting cost  recovery claims to only those costs which are “voluntarily” incurred.  

 Amici Curiae Pharmacia Corporation (f/k/a/ Monsanto Company) and Solutia Inc., filed a brief in support of Morrison’s Cert Petition.  The Amicus Brief points out that the Eighth Circuit’s holding in Morrison ignores the text of CERCLA and directly contradicts the Supreme Court’s holdings in Aviall and Atlantic Research, where the Supreme Court made it clear that courts must follow the language in the statute.   The Amicus Brief also discusses how the Eighth Circuit’s opinion conflicts with one of the principal goals of CERCLA:  encouraging private party cleanups.  One of the most significant incentives for a private party to step forward and work with the government to investigate a site and conduct a cleanup is the right to pursue other parties to recover its costs.  Limiting such a party to contribution under §113(f) significantly weakens that incentive because the government can (and will) unilaterally settle with recalcitrant parties to protect them from the performing party’s contribution claim. 

Many practitioners, along with the New Jersey Department of Environmental Protection, assumed, until recently, that the standard of liability under the New Jersey Spill Compensation and Control Act (Spill Act) was more liberal than the comparable standard under the federal analogue, CERCLA.  A recent decision of the Appellate Division of the New Jersey Superior Court, however, appears to have called that assumption into question.  New Jersey Department of Environmental Protection v. Dimant.

The case involved a fairly classic fact pattern in which PCE ground water contamination could have been caused by a number of different dry cleaning establishments.  The relevant provision of the Spill Act provides that “any person who has discharged a hazardous substance, or is in any way responsible for any hazardous substance, shall be strictly liable, jointly and severally, without regard to fault, for all cleanup and removal costs no matter by whom incurred.”  After a bench trial, the lower court ruled that the State “had not proved a nexus between a discharge by [the only remaining] defendant and the contamination” and dismissed the complaint.  The State sought to amend its complaint to assert direct claims against several third-party defendants, but the trial court ruled it was too late. 

 
 On appeal, the State argued that under the language of the Spill Act, “a direct causal connection between the discharge and the damages need not be established.”  In making this argument, the State relied on the language of CERCLA, which the State claimed “requires no direct causal connection between a defendant’s release or threatened release of hazardous substances and the plaintiff’s incurrence or response costs” and the earlier admonition of the State Supreme Court that even parties remotely responsible for causing contamination are liable under the Spill Act.  The Appellate Division found the State’s reliance on CERCLA to be “misplaced,” on the ground that CERCLA case law still requires a connection between a release of a hazardous substance and the incurrence of response costs.  The Court noted that Spill Act case law, up until then, had focused on the connection between the discharger and the offending discharge, and that “[a]lthough none of the Spill Act cases expressly state the necessity for further proving a ‘nexus’ between a discharge and damages resulting from the contaminated discharge, such a requirement is implicit in these holdings.”  The Court found support for that conclusion from the statutory definition of the term “discharge,” which “refers to resultant damage[s].”  The Court then held that “[a]s is plain from that definition, some nexus between the use or discharge of a substance and its contamination of the surrounding area is needed to support a finding of Spill Act liability.”

A subsequent Appellate Division decision followed the reasoning of Dimant. Voellinger v. Electro-Coatings, Inc.; See also, Magic Petroleum Corp. v. ExxonMobil Corp.

These decisions would appear to make it more challenging for the State to obtain liability judgments under the Spill Act, especially in those common cases where tracing the contamination back to its source is problematic.  That challenge is avoided under CERCLA, under which the government need only prove a nexus between the covered person and the facility from which there is a release, and a separate nexus between the release (not the covered person or the covered person’s hazardous substances) and the incurrence of response costs.

ASTM has just given birth to a new standard for contaminated property – E2790-11 – the Standard Guide for Identifying and Complying with Continuing Obligations, which might become the most important American Society for Testing and Materials (“ASTM”) standard for contaminated property after its Phase I and II Standard Practices.  Its six-year gestation involved the consensus building labor of the usual parties and midwives, including consultants, private and government landowners, lenders, EPA, and private practitioners. 

 Who needs another ASTM standard?  CERCLA and similar state superfund statutes require landowners to comply with “continuing obligations” after discovery that property is contaminated, whether discovered before or after acquiring real property, as a condition of maintaining the landowner liability defenses.  Since EPA is not authorized to undertake rulemaking on continuing obligations and because of concern that courts unfamiliar with environmental practices might take decades to develop a useful body of law to guide landowners, the ASTM E50 subcommittee on Real Estate Assessment and Management got to work. 

 Several of CERCLA’s six continuing obligations are straightforward and are therefore not addressed (e.g., legally required notices) in this Standard which focuses on the three continuing obligations that cover compliance with land use restrictions, institutional controls, and “taking reasonable steps” with respect to releases of hazardous substances and petroleum.  The new Standard notes that the nature and extent of the continuing obligations should be proportional to the nature, extent, and complexity of the release and the potential for exposure at the property in question.  It then describes a sequential process for determining whether continuing obligations apply, starting with identification of any recognized environmental conditions and then the review and evaluation of those conditions and activity and use limitations at the property (AULs are defined to include Institutional Controls, Land Use Restrictions, and Engineering Controls).  This important evaluation step may in turn identify the need for a “Phase II” assessment or other detailed environmental sampling to gain a clear understanding of releases and exposure pathways, and consideration of whether the landowner should take additional remedial steps, or adopt or upgrade existing activity and use limitations. 

If recognized environmental conditions do not qualify as continuing releases, threatened releases, or releases that could cause unacceptable exposure (and there are no land use restrictions or institutional controls), the procedures set forth in the Standard do not apply (other than documenting that determination).  Otherwise, the next task is to prepare a “Continuing Obligations Plan” for developing or maintaining the AULs and reasonable steps for addressing releases of chemicals of concern, and a periodic “Continuing Obligations Monitoring and Evaluation Report.”  Time is not on the contaminated property owner’s side:  continuing obligations arise upon acquiring contaminated property under the bona fide prospective purchaser defense. 

The ASTM Standard for Continuing Obligations is not intended to, and cannot replace, legal advice, and the Standard calls out the need to seek legal advice countless times.  Intended for “users” (read: real property owners), a primary audience will be environmental consultants who will find the step-by-step process of the standard and the report outline comforting.  Nevertheless, the Standard recognizes that continuing obligation determinations will be highly site-specific, providing another source of work for environmental consultants.

Of course, clients are keenly interested in what continuing obligations they must take to retain their landowner liability protections, and can be expected to ask what the law (or a court) may require.  Consultants should fear to tread, and counsel will tread carefully.

EPA’s extant guidance on “reasonable steps” to stop and prevent hazardous substance releases is almost too general to be useful.  In some cases, EPA has suggested that reasonable steps can include additional investigation (environmental testing), or steps to limit exposure (such as fencing or drum removal). 

Does this ASTM Standard help clarify what is a “reasonable step” for addressing contamination?  It does provide a next level of detail, and properly focuses on whether releases result in unacceptable exposures, but the Standard will in some cases require significantly more effort than some property owners envisioned with respect to analyzing potential future exposures and contaminant migration (e.g., the Standard mentions contamination of and migration in utility corridors), as well as ecological receptors and “species that may routinely inhabit the property or may seasonally migrate through the property” – not to mention evaluation of intended property development. 

 
The Standard also contemplates a careful review of whether AULs exist or should be adopted to address unacceptable exposures or protect remedies, and how they should be maintained.  The review may also require consideration of whether additional activity and use limitations should be adopted, and whether existing AULs should be improved.

The Standard does note one issue that historically has not been part of the environmental lawyer’s beat:  a determination of whether prior recorded interests (such as an easement or mortgage) can potentially compromise or otherwise defeat a land use restriction or institutional control.  Those familiar with recorded Environmental Covenants under the recent Uniform Environmental Covenants Act will recognize this issue, but real estate law governing recorded interests can impact all AULs recorded after the prior interest.  The continuing obligation duty in some cases may require obtaining consent for a land use restriction from an outstanding interest holder.  Can you say “subordination”?  

By publishing a Standard, ASTM is providing a ready reference as courts weigh whether these three continuing obligation elements of the CERCLA defense have been established.  Depending on the complexity of the site and the issues, clients would be wise to consider the investigation and documentation processes.  Of course, the Standard is not a legal requirement, but environmental practitioners may wish to identify sites and transactions where the Standard can be helpful to clients in limiting unwanted exposures and liability – recognizing that whether continuing obligations are satisfied will be evaluated with the benefit of hindsight.

Phase I Environmental Site Assessments (Phase I ESAs) are conducted: (1) to assess environmental and health risks related to the acquisition and development of real property and (2) as a critical component of establishing the Bona Fide Prospective Purchaser (BFPP) or related defenses to “owner” liability under CERCLA. A recent ACOEL posting discussed the importance of compliance with post-closing BFPP obligations. What about the adequacy of the Phase I ESA process itself?

A Phase I ESA must satisfy the requirements of “All Appropriate Inquiry” (AAI), which have been incorporated in the ASTM E 1527-05 Standard. Phase I ESAs are not, however, typically examined by environmental agencies and there is a dearth of judicial interpretation of the AAI requirements. To date, the determination of AAI compliance and BFPP status has been the province of the regulated and not the regulators.

The scenario is familiar. A transaction includes the acquisition of commercial property. The client has a general notion of AAI and the importance of the Phase I ESA to achieve BFPP status. The client usually does not know, or care to know, the specific elements of AAI. The Phase I ESA often becomes a transactional commodity to be purchased from the lowest bidder. Lawyers are content to accept the results of the bidding war, relying on the self-certification of the Environmental Professional (EP) that the assessment is compliant with the ASTM Standard. The ESA is conducted, the report issued and the transaction closed with everyone satisfied that environmental risk management has been adequately addressed. This process appears appropriate, at least when agencies or courts are not called upon to perform a more rigorous evaluation.

A February 14, 2011 report issued by the EPA Office of Inspector General (OIG) may serve as the impetus for a more cautious approach to selecting the EP in transactional and Brownfield grant matters and for more carefully evaluating Phase I reports. The OIG report documents the results of its evaluation of 35 AAI/Phase I reports generated by EPs for Brownfields Program grantees. The OIG concluded that none of the Phase I reports satisfied all of EPA’s AAI rule requirements. OIG criticized EPA for its complete reliance on EP self-certifications of compliance, its failure to establish accountability for compliant reports and the lack of procedures for reviewing reports to determine compliance with AAI requirements.

Although many of the AAI deficiencies cited by OIG were arguably very minor, the message sent was clear: Noncompliant Phase I ESAs introduce risk that the environmental conditions of a property have not been adequately assessed for the purpose of making informed property use and redevelopment decisions or for identifying risks to human health and the environment. OIG’s recommendations were equally clear - stop relying on EP self-certifications and develop a process for more careful scrutiny of AAI reports to determine actual compliance. The issues raised by the OIG report can, of course, be easily transformed into legal arguments in court where BFPP status may be in issue.

I suspect that many of us have been lulled to sleep by the self-certifications of the EP. Has the time arrived to more carefully assess the assessor and treat the Phase I ESA as a site-specific professional evaluation and not a low-bidder commodity required simply to seal the deal?